Dell is back in Wall Street's favor, showing profit and big growth in AI servers

By Therese Poletti

Dell Technologies Inc. should be back in Wall Street's good graces after Thursday's fiscal second-quarter results showed that it can post solid profits in AI servers - a big turnaround from the previous quarter.

Dell (DELL) saw an 80% revenue jump in its server business, called its infrastructure solutions group, driven by AI-server sales. Chief Financial Officer Yvonne McGill told analysts on the company's earnings call that the division's operating income was up 22% to $1.3 billion, or about 11% of revenue, due to higher revenue and scaled-back operating expenses.

Last quarter, investors will remember, Dell reported strong demand for servers, driven by AI, but operating income fell, causing some analysts to wonder if there were no profits in AI servers. That led to a sharp decline in Dell's stock; earlier this month its shares were 50% off its May highs.

Vice Chairman and Chief Operating Officer Jeff Clarke told analysts Thursday that Dell is also selling services around its servers, to help customers with factory integration, solution testing and deployment on-site.

"We have the right AI portfolio, with more to come, the right services capabilities and we are optimizing our sales coverage to capture this once-in-a-generation opportunity," Clarke said.

In after-hours trading, Dell shares jumped 3.3%. The enthusiasm over the positive results in servers may have been tempered a bit by the reined-in outlook for the PC industry's rebound. In the last quarter, Dell's client solutions group - basically its PC business - was down 4%.

Company executives said they now expect the PC market to rebound toward the end of the year, and that it will be a big refresh.

"We have a Windows 10 end-of-life date. We have an aging, installed base of machines bought during the COVID era, all waiting to be refreshed, with exciting new products built around AI," Clarke said.

Whether Dell's improved profits in its AI servers were mostly due to its recent cost-cutting moves will likely be in evidence next quarter. The company has a strong, $3.8 billion backlog of orders for servers in the third quarter, after shipping $3.1 billion worth of AI servers in the second quarter.

For now, investors should be happy with the results. If Dell can continue to prove that it is adding extra value to its server sales going forward, it may continue to shine in Wall Street's favor, as a stand-out amid competitors in a tough, notoriously low-margin business.

-Therese Poletti

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08-29-24 2050ET

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